CEO Political Leanings and Store-Level Economic Activity during COVID-19 Crisis: Effects on Shareholder Value and Public Health

The costs and benefits of national, state, and local policies intended to inhibit the transmission of COVID-19 and protect public health are the subject of an ongoing debate in the U.S. At the heart of this debate is the trade-off between the benefits of opening up an economy and the potential risks to public health. In particular, social distancing and other policies that limit the spread of COVID-19 (e.g., wearing masks, travel restrictions, limiting number of customers in a store) can also reduce economic activity.

Evidence from academic studies and surveys indicates that political and cultural beliefs are associated with individual attitudes towards both COVID-19 and policies intended to limit virus transmission. Individuals identifying themselves as Democrats are more likely to adopt stricter social distancing measures compared to those identifying themselves as Republicans. Such attitudes and beliefs about the pandemic and the economic costs and benefits of social distancing are likely to extend to CEOs and other firm executives. Restrictive policies that aim to protect the health of store employees and customers can impose a burden on a firm and its customers, reducing store visits. Conversely, lenient policies that aim to boost store traffic can provide a channel for virus transmission. We note that differences in ideology do not mean that Republicans solely prioritize the economic benefits of opening the economy over the potential public health risks, or that Democrats are unaware that restricting commerce to provide public health benefits can have detrimental effects on the economy. Political leanings, however, are likely to tip the scale in how political ideology affects prioritizing the potential trade-offs.

In our paper, CEO Political Leanings and Store-Level Economic Activity during the COVID-19 Crisis: Effects on Shareholder Value and Public Health, (Journal of Finance, October 2022), we provide evidence of a trade-off between firm-level economic activity and public health concerns at the onset of the COVID-19 pandemic. We show that CEO political leanings affect this trade-off.

Using data on establishment-level visits at the onset of COVID-19 (March to May 2020), we document that CEO political leanings affect store traffic. Firms whose CEOs contributed primarily to the Republican party’s political campaigns experience a relative increase (or smaller decrease) in visits to those firms’ retail establishments during the onset of the COVID-19 crisis. This effect is economically large – the presence of a Republican-leaning CEO results in a relative increase in weekly store traffic of 6% to 11% (compared to the unconditional sample-wide decrease in store traffic of 18%). Moreover, the effect of a Republican-leaning CEO is stronger in states and counties with less restrictive COVID-19 policies in place and therefore greater latitude for firms to adopt policies that facilitate store traffic.

We examine whether the policies facilitating (or restricting) store visits result in benefits to firms and their shareholders. We study the stock performance of the sample firms from the onset of the market-wide reaction to the COVID-19 pandemic, starting on February 20, 2020 (the beginning of the precipitous drop in all market indices), until May 17, 2020. There are two distinct periods in our sample in terms of aggregate equity market performance: a sharp decline in S&P 500 returns during the period February 20 through March 23, 2020, and a significant increase during the period March 24 through May 17, 2020. Higher store traffic is associated with increased stock returns: on average, a 1% increase in store traffic is associated with a 0.25% increase in abnormal stock returns. These effects come primarily from the period of market-wide decline in stock returns. Thus, firms that experienced a relative increase in visits had a much lower negative performance during the market meltdown in the last week of February and the first three weeks of March, and hence were able to preserve shareholder value. We also find that physical store visits result in an increase in firm sales—for a 1% increase in visits, quarterly sales go up by 0.4%. These results suggest strong immediate economic benefits to the firm from relaxing restrictions on store traffic.

However, we find that the policies facilitating store visits and leading to increased sales and stock returns also result in costs to communities. COVID-19 transmission rates are higher in counties with a greater proportion of store visits by firms with a Republican-leaning CEO. We document that the number of alleged hazards in COVID-related workplace safety complaints filed with OSHA is positively related to store traffic and is higher when a greater proportion of the store traffic in the county comes from stores with a Republican-leaning CEO. Our evidence points to the trade-off between the benefit that firms and their shareholders experience from increased store visits and the social cost of higher transmission of COVID-19 to the community.

Our study suggests that examining the effects of public policies alone overlooks the effect that businesses have on COVID-19 transmission and in turn on public health. Businesses play an important role in the transmission of COVID-19, and their practices can weaken or strengthen the effect of public policies put in place by national, state, or local governments. While firms internalize the benefits from increased economic output, their policies on regulating traffic in retail establishments entail an adverse public health effect for the community at large.

The complete paper is available for download here.